State coffers built on sinking foundations

On a cool Saturday morning in Melbourne, a well-tailored auctioneer surveys a small group gathered for the sale of a two-bedroom house in the inner city.

Animated and enthused, the auctioneer opens the bidding. He cajoles and crows as the crowd shuffles its feet. Despite exhortations that verge on demented, he can entice no bidding from the lacklustre crowd.

He disappears inside to consult the vendors, and emerges to inform the remaining gawpers that the house has been passed in. This scenario – which has become familiar nationwide as auction clearance rates dip below 50 per cent – deprives not only the vendor. State governments, whose budget arteries are fed by stamp duties, are weakening as the heartbeat of the property market grows faint. Victoria has net debt of $16.9 billion, which is forecast to grow alongside narrow budget surpluses that may be challenging to achieve.

Queensland has no net debt in 2011-12, but its budget projects fat deficits that will push its balance sheet $10 billion into the red by 2012-15; NSW had $32.4 billion in net debt in 2010-11; and WA has $16.6 billion in net debt and a narrow surplus.

The budget shortfalls come at an inopportune time – a crescendo of voices is saying the time for state budget reform is now. States are addicted to taxes that twist and wrack their economies; stamp duties, payroll taxes and levies that the Henry review described as “inherently of poor quality".

Number one on the list is stamp duty. The blood that runs through state government veins is money raised by taxing property. It has long been worth billions, and as property prices rose, states got used to seeing their coffers full to overflowing.

But as property prices stopped growing, stalled and began to fall, and property sales figures drop, the healthy flow of money into the veins of state bureaucracies began to clot.

According to ABS data, Australian house prices are below 2009-10 levels, and any signs of a recovery are ambiguous at best. Raising stamp duties is a tough ask when infrastructure is crying out for investment.

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Stamp duties – about $30,000 on a $750,000 house in NSW – slug home sellers and buyers, and are one reason why Australians move jobs on a whim but stick to a house like glue. A tax on moving houses means people are reluctant to move closer to their jobs, and so increases the burden on road and public transport infrastructure.

That infrastructure burden is itself another headache for premiers, who face an infrastructure task worth an estimated $500 billion.

The last big slice of the cake is goods and services tax, worth $48 billion a year. When he introduced it,
John Howard
pledged GST receipts would flow to the states.

It is therefore no wonder that in a time of deficits, the share of the GST states receive is a political hot button.

A major review of how to divide GST was commissioned by the Prime Minister in 2011. It is being led by former premiers
John Brumby
and
Nick Greiner
and has already delivered a confidential interim report to the Treasurer.

GST payments are not determined by the amount of GST paid in a particular state, but by a state’s capability to raise its own funds. That can create a sense that boom states are being punished. In 2011-12 WA got $3.6 billion in GST payments, about the same as it received in 2004-05; while total payments expanded by one-third.

The final report, expected in May, will set up a a seagull-style squabble among the states over GST receipts.

But if the seagulls are looking scrawny, that’s because their regular diet of growing receipts of payroll tax, stamp duties, gambling and motor car taxes is not only failing to nourish them, but is poisoning their economies. And the report will open the door to the heretical idea of getting rid of them.

Treasurer
Wayne Swan
changed the terms of reference of the review in January to include more consideration of state taxes.

The review would now consider “incentives and disincentives to promote future state policy decisions which improve the efficiency of state taxes", he said.

It is worth remembering that in 2000, the introduction of the GST was tied to reform of states taxes, many of which still remain, stunting economic growth. Payroll taxes depress wages and discourage hiring at medium-sized businesses. In the ACT, for example, the rate is 6.85 per cent and kicks in at payrolls above $1.5 million a year.

What the GST review will say – and when it will be released – is unknown, but until it is released, speculation will continue to run.

Some radical suggestions have emanated from NSW, where former treasurer Michael Lambert was commissioned by the NSW government to review state finances. In the body of his 627-page report were recommendations so explosive the government refused to release the report for eight months.

Lambert recommends abolishing the emergency services levy, health insurance levy and insurance duties. But these potentially popular reforms were to be paid for with measures less politically palatable. Among these are instituting a levy on rateable property, lowering the threshold at which the payroll tax cuts in and getting rid of stamp duty, replacing it with a tax on land value.

Lambert advocates letting road pricing account for a much greater part of revenue, including by looking into variable congestion pricing. He also said public transport fares should rise.

NSW Premier
Barry O’Farrell
has made no response to the review, but he is likely to come closest to adopting Lambert’s suggestion of a “rolling efficiency review".

Like the federal government, states may not have the stomach for tax reform, but they are busy cutting their budgets to get back in the black.